The Bank of Canada may want to sell
Canadian dollars to temper gains driven by purchases by other
central banks, said Avery Shenfeld, chief economist at Canadian
Imperial Bank of Commerce.

The dollar’s strength undermines Carney’s ability to raise
interest rates to slow increasing household debt levels,
Shenfeld said in the report, saying further gains in the
country’s currency may slow growth. Governor Mark Carney left
the bank’s key interest rate at 1 percent for a second meeting
Dec. 7 and said weak exports cut growth in the second half of
this year.

“There is one weapon yet to be touched: fighting fire with
fire,” Shenfeld said in a report today. “Canada could match
foreign central bank intervention in favor of our currency with
an offsetting intervention, selling an equivalent volume of
loonies.”

Canada hasn’t done transactions in the currency market to
influence the country’s exchange rate since 1998, a period that
includes moves to a record low and a record high. The central
bank’s policy restricts intervention to cases where foreign
exchange markets break down or when currency movements
“seriously threatened” long-term economic growth, according to
its website.

The Canadian dollar slid 0.6 percent to C$1.0119 per U.S.
dollar at 11:05 a.m. in Toronto, from C$1.0061 yesterday. One
Canadian dollar buys 98.82 U.S. cents. The Canadian dollar has
gained 25 percent against the U.S. dollar since March 2009.

‘Seldom Works’

Carney told lawmakers in October that unilateral action in
currency markets “seldom works.” He also said that
intervention remained a possibility if there was a serious
threat to the economy from global currency “tensions.”

The central bank and government “maintain considerable
options to control the situation if that is necessary,” Carney
told members of the Commons Finance Committee Oct. 26. “We have
to observe persistent strength in the Canadian dollar, which has
the potential to seriously influence Canadian economic growth.”

Russia’s central bank last month said it started adding the
Canadian dollar to its international reserves. The share of
Canadian dollars in Russia’s international reserves, the world’s
third biggest, may reach between 1 percent and 2 percent,
central bank Chairman Sergey Ignatiev said Dec. 8.

“Intervention was not likely earlier this year and is very
unlikely now,” Shaun Osborne, chief currency strategist in
Toronto at Toronto Dominion Bank’s TD Securities unit, wrote in
an e-mail. “Inflows into the Canadian dollar have been running
at very high levels for some time.”

‘Not Guaranteed’

“The lesson from the likes of the Swiss National Bank and
the Bank of Japan this year is that you have to intervene in a
very significant way and even then, a positive result is not
guaranteed,” Osborne said.

Finance Minister Jim Flaherty, who would need to approve
any foreign exchange intervention, said in January that central
bank purchases of Canadian dollars reflects his country’s strong
fiscal position and “substantial” pressure on the U.S.
currency to depreciate.

“Investments by other central banks in Canadian securities
and the Canadian currency is a recognition of the fiscal health,
relatively speaking, of Canada, which is strong,” Flaherty told
reporters. “There’s downward pressure on the U.S. dollar, which
results in upward pressure on other market currencies.”